GCBC - Greene County Bancorp: This Stable Regional Bank Is A Buy

2023-04-21 13:01:42 ET

Summary

• Very small regional banks have been holding up well this earnings season.
• Greene County Bancorp, Inc. stock is at one-year lows, but performance remains strong.
• The yield is low here, but we think Greene County Bancorp stock has an upside for a trade.

Greene County Bancorp, Inc. ( GCBC ) is a regional bank stock in upstate New York. It is another smaller regional bank that we believe is well insulated from the recent banking chaos. The stock, like so many other regional banks, has been crushed in the last few months, and we believe this is overdone.

We have initiated our earnings coverage of regional banks this week, and we are seeing some clear winners and losers. We have been most interested in trends in deposits to see if there is evidence of a bank run. While we have seen some signs of deposit runs on the largest regional banks, we are not seeing evidence of that in the smallest regional banks. We would consider Greene County Bancorp, Inc. a smaller one, and its key metrics suggest that the stock at $20 is a good long-term buy here, but also appears to be setting up for a nice trade.

Why do we say this? Well, Greene County Bancorp, Inc. just put out a strong quarterly and first nine months FQ3 earnings report . We continue to expect some choppy trading in the coming months for the overall market, and believe the overall market is going to sell off hard in late spring and summer. We think that this will allow you to get GCBC shares under $20 here, which we consider a very attractive level for entry. We believe the setup for banks is strong over the next few years, despite the recent drama. Although we are expecting a mild recession, we think that GCBC stock moves higher beyond 2023, after bottoming out this year, in our opinion. We think you can do some buying for a trade under $20. Let us discuss the earnings.

Results For Q3 And The First 9 Months Of The Fiscal Year

Greene County Bancorp, Inc. reported net revenues of $18.2 million in fiscal Q3. This was a decent performance, growing 7.6% from last year. The top-line beat was a driver of strength, but banks are prepping for recession and preparing for losses, which weighed somewhat on earnings, and it appears net interest margins are peaking, but are strong.

Margins were strong. Net interest income increased $1.1 million to $15.2 million Q3, up from $14.1 million last year. Net interest income increased $4.1 million to $47.0 million for the nine months period versus the $42.9 million for last year's period. This is very strong. How about the margins? They peaked, but were strong as average loan yields grew, but the yield on interest earnings deposits also increased 96 basis points.

Net income was a new record. Net income was $8.1 million, or $0.48 per share, compared to $7.2 million, or $0.42 per share in last year. That is very solid. For the first nine months, net income was $24.3 million, or $1.43 per share, versus $21.2 million or $1.24 per share. Keep in mind that loans and deposits also grew to new records, quelling fears of a bank run, at least for another smaller regional bank. Average loan balances increased $231.9 million in the first 9 months compared to last year. Total deposits grew to $2.5 billion as of the end of the quarter.

Efficiency Of Greene County Bancorp

The efficiency ratio is important to monitor for regional banks. We believe that the strongest banks have an efficiency ratio under 60%. Greene County's efficiency ratio is strong, but it did worsen. For Q3, the ratio was 53.90, a worsening from 48.93% last year. For the first 9 months as a whole, we also saw a decline in efficiency to 51.05% versus 47.32% a year ago. Why the decline? Simply put, the cost of funds is rising as banks are now paying much more on deposits and the yields on loans, while strong, are not keeping pace with the deposit yields. As such, margins are crimped.

Once again, despite lower margins, slightly, and efficiency dipping, the return metrics are improving. The first 9 months return on assets improved to 1.26% from 1.21% a year ago. Further, the return on average equity is also improving, coming in at 19.51% versus 18.09% a year ago. Unlike many banks, the allowance for loan losses to total loans declined to 1.5% from 1.88% a year ago, though non-performing assets ticked higher to 0.19% of assets versus 0.16% of assets in the comparable period last year.

While the metric is mixed, this is a strong-performing bank. We think the massive decline is overdone. Despite our belief that the market is going lower., we think investors should consider a position in this bank on declines under $20 per share.

Take-Home

Overall, the Greene County Bancorp, Inc. metrics remain clearly mixed, and margins have peaked. However, GCBC shares have pulled back massively from highs. There has been no evidence of a run-on deposits, as they have grown, while the Greene County Bancorp, Inc. loan book has also grown.

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